[Opinion] Competition (Amendment) Bill, 2022 – A Critical Examination

[2022] 141 taxmann.com 321 (Article)

The Competition (Amendment) Bill, 2022 (hereinafter, ‘the Bill’) was introduced in the Lok Sabha on 5th August, 2022. Considering the rapid growth of Indian markets and evolution of business practices, the Government of India had earlier constituted the Competition Law Review Committee (hereinafter, ‘CLRC’) to examine and suggest modifications in the Indian Competition Act, 2002 (hereinafter, ‘ICA’). The ‘Bill’ has been drafted after review of the recommendations proposed by the CLRC, public consultations and with a view to provide regulatory certainty and trust-based business environment. The Bill also tries to assimilate the experience of the Commission over the last one decade.

In the present article, we have examined some of the key changes that have been proposed to be made within the ICA.

1. Inclusion of supply side substitutability within the definition of relevant product market.

Delineation of relevant market is essential to the determination of dominance under Section 4 of the Act. As per Section 2(r) of the ICA, relevant market is defined with respect to relevant product market (hereinafter, RPM) and relevant geographic market defined under Section 2(s) and section 2(t) respectively. The definition of RPM under the ICA takes in to account ‘demand side substitutability’ of the product or service from the standpoint of consumer. The Competition (Amendment) Bill, 2022 seeks to add supply side substitutability as an alternate way to delineate RPM. Accordingly, RPM also means a market comprising of all those products and services, “the production or supply of, which are regarded as interchangeable or substitutable by the supplier, by reason of the ease of switching production between such products and services and marketing them in the short term without incurring significant additional costs or risks in response to small and permanent changes in relative prices.” The inclusion of ‘supply side substitutability’ was also recommended by the CLRC. Although the CLRC recognized that there is no enforcement gap in the current provision, it favoured the inclusion of supply side-substitutability, in the “interests of comprehensiveness”. The Competition Commission of India (hereinafter, CCI) has itself employed the test of supply-side substitutability in a handful of cases.

It has to be noted that the application of supply-side substitutability to delineate RPM is conditional. The proposed amendment is on similar terms as the European Commission Notice on the definition of relevant product market. Accordingly, supply-side substitutability may be taken into account when defining markets in “those situations in which its effects are equivalent to those of demand substitution in terms of effectiveness and immediacy”. Therefore, ability to switch and market product or services in short term without significant adjustment of existing tangible and intangible assets or without incurring significant costs/risks in response to small and permanent changes in relative prices, will be crucial because it is only then that the additional production that is put on the market will have a disciplinary effect on the competitive behaviour of the companies involved. As per the European Commission,

“supply-side substitutability is likely to be of relevance in situations when companies market a wide range of qualities or grades of one product; even if for a given final customer or group of customers, the different qualities are not substitutable, the different qualities will be grouped into one product market provided that most of the suppliers are able to offer and sell the various qualities under the conditions of immediacy and absence of significant increase in costs…”.

The competition authority will not factor supply side substitution into market definition unless it is reasonably likely to take place, and already has an impact by constraining the supplier of the product or group of products in question. Therefore, although the Bill includes supply substitutability as an independent method to delineate relevant product market, the application of the same is conditional and can only be applied, as discussed above, in certain circumstances.

2. Broadening the scope of anti-competitive agreements

The ‘Bill’ proposes to broaden the scope of anti-competitive agreements by including any party facilitating an anti-competitive horizontal agreement under such agreements. As per clause 4 of the Bill, the following proviso shall be inserted in Section 3(3):

“Provided further that an enterprise or association of enterprises or a person or association of persons though not engaged in identical or similar trade shall also be presumed to be part of the agreement under this sub-section if it actively participates in the furtherance of such agreement.”;

Traditionally, the anticompetitive agreements have been divided into two types, horizontal and vertical agreements. Previously, the CCI faced issues in applying Section 3(3) to entities facilitating cartels. On many occasions involving restrictive practices of the pharmaceutical trade associations, the drug companies were found to be facilitating the restrictive covenants of the associations. Since, there is no horizontal agreement between the drug companies and the trade associations, the CCI had to resort to the generality of Section 3(1) to penalize these companies. The proposed Bill will help the CCI to proceed against any entity which acts to facilitate a cartel. The proposed clause will also help in expanding the scope of cartels to include hub and spoke arrangements implemented by entities involved at different levels of the value chain.

The term ‘hub and spoke’ is derived from the analogy of a wheel, where the participants in the same level of the production cycle are spoke of the wheel, the participant which is either the common supplier or the retailer is the hub of the wheel and the agreement is the rim of the wheel, thus making it a functioning mechanism. Hub is not present at the same level of the spokes.

“The statutory recognition attributes the same extent of liability on facilitators of horizontal agreements such as trade associations etc., and vertically related enterprises such as suppliers, distributors etc., as the horizontally related cartel participants.”

Arguments around hub and spoke have cropped up before the CCI on a couple of occasions. In Samir Agrawal, the CCI noted that

“hub and spoke arrangement refer to an exchange of sensitive information between competitors through a third party that facilitates the cartelistic behaviour of such competitors”.

The Commission stated that hub and spoke arrangements involve, generally, the spokes to use a third-party platform i.e. a hub for the exchange of information and there should be some kind of conspiracy. The proposed amendment categorizes hub and spoke arrangements as horizontal agreements which therefore would invite a per se analysis. It remains to be seen as to the approach of CCI in light of the new addition to Section 3. It will be difficult for the DG to firstly prove horizontal agreement between spokes and then prove the active participation of the hub in such agreement. The term ‘active participation has also not been defined. Further, the DG will have to prove intention of the hub to aid the spokes in carrying out the anti-competitive arrangement. The proviso gives an impression that there is no need to prove agreement between the hub and spokes. The conscious actions of the hub to aid the alleged horizontal agreement would be enough. The presumption in the proviso however will penalize the hub in the same manner as the spokes.

Interestingly, as per the second proviso to the newly inserted leniency provision under Section 46, lesser penalty shall be imposed by the Commission only in respect of a producer, seller, distributor, trader or service provider included in the cartel, who has made the full, true and vital disclosures under this section. There is a sense of ambiguity to the extension of leniency to entities that although not part of the cartel arrangement, helps in its implementation. It would have been better if the statute had defined ‘hub and spoke’ and also provided clarity with respect to treatment of hub under the penalty and leniency regime.

3. Mandatory pre-deposit for appeal

As per Section 53B of the Act, the Central Government or the State Government or a local authority or enterprise or any person, aggrieved by any direction, decision or order referred to in clause (a) of section 53A may prefer an appeal to the Appellate Tribunal. The ‘Bill’ seeks to add a proviso after Section 53B(2) as per which

“no appeal by a person, who is required to pay any amount in terms of an order of the Commission, shall be entertained by the Appellate Tribunal unless the appellant has deposited twenty-five per cent. of that amount in the manner as directed by the Appellate Tribunal.”

The proposed provision gives statutory force to the pre-deposit practice of the appellant forum in case of competition appeals. The same was recently in question before the Apex Court where it had held that

“the right to appeal granted by a statute cannot be curtailed by imposing a condition of pre-deposit of penalty, which can result in the dismissal of the appeal, if such deposit is not satisfied”.

The Apex court had earlier declared that non-compliance of the NCLAT stay order will not impact the substantive appeal

The requirement of pre-deposit also figures in some other Indian legislations like the Employee State Insurance Act, 1948; Central Goods and Services Tax Act, 2017; Central Excise Act, 1944; Customs Act, 1962, RERA Act, 2016 etc. In fact, the Supreme Court has observed that once the statute has fixed the condition of pre-deposit before filing an appeal, such condition is required to be satisfied.

Previously, the appellate authority was competent to decide the amount of pre-deposit required to be made by the Appellant after taking into consideration the merits of the case and /or considering financial hardship as well as to safeguard the interest of revenue. This decision was taken by Tribunal while considering the application of the Appellant for stay of the order against which he has preferred appeal. The appellate authorities were even competent to order a small amount of pre-deposit or to waive the pre-deposit altogether. However, no discretion as such will now be available with the appellate body. If the prescribed pre-deposit is not made at the time of filing the appeal, the appeal is liable for rejection. The appellate forum in the past has granted interim relief on penalties subject to the appellant depositing 10% of the penalty amount by way of an interest-bearing fixed deposit with the NCLAT’s registry.

Pre-requisite of deposit of 25% of the penalty amount would certainly increase the cost of appeal. Further, there are no details yet on status of deposit in case of successful or lost appeals, especially in terms of accrued interest. It is also not clear as to how this move will reduce frivolous appeals. The CLRC, in fact advocated for expeditious disposal of competition appeals by the NCLAT, and that the appellate tribunal must be adequately staffed in line with the Government’s efforts at capacity building. However, there is nothing in this regard in the ‘Bill’.

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